The Pros and Cons of Balanced Funds for Retirement Income

A balanced fund automatically spreads your money across a diversified portfolio of stocks and bonds. Most of the time a balanced fund will specify an allocation such as 60% stocks and 40% bonds and stick closely to that allocation. This moderate risk approach can work well for those in and near retirement.

The Pros of Balanced Funds for Retirement Income

Rather than having to select a stock fund (or several stock funds) and a bond fund (or several bond funds) you can own one fund which automatically chooses the underlying stock and bond investments for you. The stock portion will be diversified across many different types of stocks. It is a low-cost way to diversify your money which reduces the chances of picking the wrong stock.

The mutual fund management team is responsible for researching and selecting the investments inside a fund. They also do all the day-to-day monitoring and investment adjustments. So, not only do you not have to be an expert on stock or bond investing, but you also do not have to determine which ones to sell or buy. You just have to decide to put money in or take money out of the fund.

Balanced funds are great when you have smaller amounts to invest, or when you don’t understand investing very well and aren’t ready to hire a financial advisor. The fee charged inside a mutual fund is called an expense ratio. You never see the expense as they take it right out of the total mutual fund value. Before investing in a fund, learn about how mutual fund expenses work and choose funds with lower than average fees.

In retirement a balanced fund allows you to take systematic withdrawals while maintaining an appropriate asset allocation easily. This approach may work well for those who have one account to draw from, such as $100,000 in an IRA where they want to take out $400 a month.

The Cons of Balanced Funds

Sometimes the fees in a balanced fund will be a bit higher than if you choose your individual index funds because the fund management team is doing the work of selecting the underlying mix of stocks and bonds and changing it as needed.

Within the balanced fund, you cannot choose how much is in what type of stocks, such as international, small cap, large cap; or what type of bonds, such as government, corporate or high yields. Of course, the whole point of the balanced fund is that someone else is making those asset class choices for you.

As your portfolio size grows larger during your accumulation phase, if you have investments across numerous different types of accounts it may make sense to locate certain investment types, such as bonds, within your tax-deferred retirement accounts, while locating stocks in your non-retirement brokerage accounts. You cannot do this with a balanced fund as the same fund owns both bonds and stocks.

In your retirement phase, if you have a larger portfolio size and numerous types of accounts, you may want to use a bond ladder so that the bond portion of your portfolio lines up in each account with the number of withdrawals you will need from that account. You will not be able to do this with a balanced fund.